Market evidence identifies a house’s walk-through bedroom layout as functional obsolescence. The only feasible cure costs $60,000 and would add $20,000 to value; no other benefit offsets the cost. How is this deficiency classified economically?
Correct Answer
D) Functional obsolescence - incurable
The deficiency concerns functional utility, rather than physical wear or an outside influence. Under the stated feasible alternatives, the $60,000 cure exceeds its $20,000 value benefit, so the functional obsolescence is economically incurable. This comparison does not make the $60,000 cost or $40,000 difference an automatic measure of market depreciation.
Why This Is the Correct Answer
Option D is correct because functional obsolescence is curable only if the cost to cure is less than or equal to the anticipated increase in value. Here the $60,000 cost exceeds the $20,000 value increase, so the deficiency is not economically feasible to cure and is classified as incurable functional obsolescence.
Why the Other Options Are Wrong
Option A: Functional obsolescence - curable
Option A is wrong because curable functional obsolescence requires the cost to cure to be no more than the value it adds. A $60,000 cure that adds only $20,000 fails that test.
Option B: Physical deterioration
Option B is wrong because physical deterioration refers to wear, tear or damage. A walk-through bedroom is a layout and design problem, not physical wear.
Option C: External obsolescence
Option C is wrong because external obsolescence is caused by factors outside the property. The walk-through bedroom is an internal design deficiency, so it is functional rather than external.
Cure only if it pays
An item is curable only when fixing it adds at least as much value as it costs; if the cure costs more than it adds, it is incurable.
How to use: Use this to classify any physical or functional item as curable or incurable.
Exam Tip
First identify the type of depreciation from the cause, then compare cost to cure with value added to decide curable or incurable.
Common Mistakes to Avoid
- -Classifying a design flaw as physical deterioration
- -Calling an item curable just because it can physically be fixed
- -Using the cost to cure or the cost-value difference as the automatic measure of depreciation
Concept Deep Dive
Analysis
This question tests classifying depreciation as curable or incurable functional obsolescence. A walk-through bedroom layout is a functional design problem, and since the $60,000 cure costs more than the $20,000 increase in value it would produce, it is not economically feasible to cure.
Background Knowledge
Depreciation in the cost approach has three categories: physical deterioration, functional obsolescence and external obsolescence. Physical and functional items are classified as curable or incurable by comparing the cost to cure with the expected value increase. External obsolescence is generally considered incurable by the owner because its cause lies outside the property.
Real-World Application
An appraiser finds a home where the only access to one bedroom is through another bedroom, and market data show buyers discount it. A contractor's estimate shows reconfiguring the floor plan would cost far more than the value it would add, so the appraiser treats it as incurable functional obsolescence and measures the loss from market evidence.
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